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2008•Applied Economics LettersOpen access

Are real exchange rates mean reverting? Evidence from a panel of OECD countries

Özgür Aslan, Levent Korap

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Abstract

In our article we employ some contemporaneous panel unit root tests (Maddala and Wu, 1999 Maddala, G. S. and Wu, S. 1999. A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61: 631–52. [Crossref], [Web of Science ®] , [Google Scholar]; Im et al., 2003 Im, K. S., Pesaran, M. H. and Shin, Y. 2003. Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115: 53–74. [Crossref], [Web of Science ®] , [Google Scholar]) to examine whether the real exchange rates are mean reverting. Considering a panel of 26 OECD countries from 1987 to 2006 both using monthly and quarterly observations, we find that assuming a panel framework significantly increases the power of unit root tests. As a result, we find that the nonstationarity of the real exchange rate has strongly been rejected in favour of giving support to the purchasing power parity.

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What this paper is about

In our article we employ some contemporaneous panel unit root tests (Maddala and Wu, 1999 Maddala, G. S. and Wu, S. 1999. A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61: 631–52. [Crossref], [Web of Science ®] , [Google Scholar]; Im et al., 2003 Im, K. S., Pesaran, M. H. and Shin, Y. 2003. Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115: 53–74. [Crossref], [Web of Science ®] , [Google Scholar]) to examine whether the real exchange rates are mean reverting. Considering a panel of 26 OECD countries from 1987 to 2006 both using monthly and quarterly observations, we find that assuming a panel framework significantly increases the power of unit root tests. As a result, we find that the nonstationarity of the real exchange rate has strongly been rejected in favour of giving support to the purchasing power parity.

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Available abstract

In our article we employ some contemporaneous panel unit root tests (Maddala and Wu, 1999 Maddala, G. S. and Wu, S. 1999. A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61: 631–52. [Crossref], [Web of Science ®] , [Google Scholar]; Im et al., 2003 Im, K. S., Pesaran, M. H. and Shin, Y. 2003. Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115: 53–74. [Crossref], [Web of Science ®] , [Google Scholar]) to examine whether the real exchange rates are mean reverting. Considering a panel of 26 OECD countries from 1987 to 2006 both using monthly and quarterly observations, we find that assuming a panel framework significantly increases the power of unit root tests. As a result, we find that the nonstationarity of the real exchange rate has strongly been rejected in favour of giving support to the purchasing power parity.

Key concepts: Purchasing power parity, Unit root, Mean reversion, Econometrics, Economics, Panel data, Exchange rate, Unit (ring theory)

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